Gold Forecast: Bond yields and geopolitics on the radar as traders’ eye fresh highs

• Gold has had a strong inverse relationship with US long bond yields over the past month but not the US dollar
• Fed speak and bond auctions loom as known events that could move yields – and gold – this week
• Gold has been grinding higher but it faces some key technical challenges ahead

Gold’s outlook looks set to be dictated again by geopolitical tensions in the Middle East along with the US interest rate outlook. On track for its largest weekly gain in nearly two months ahead of the payrolls report, the directional risks appear skewed to the upside near-term, putting a retest of the highs hit last year on the radar.

What’s influencing gold near-term?

Looking at what may be influencing gold right now, it’s good to track at what its key long-term drivers are doing: the US dollar as that’s the convention most traders focus on and US bond yields given bullion offers no yield and comes with sizeable carry costs if held in physical form.

Keep an eye on long bonds

Since the beginning of the year, gold has been influenced by shifting expectations for the US rate outlook, especially the flow-through impact to the longer end of the US bond curve. In contrast, the relationship the US dollar index, or DXY, have been weakening.

Gold’s inverse correlation with US benchmark 10-year bond yields has been -0.84 over the past month, with the inverse relationship with US 2-year yields a little weaker at -0.77. Interestingly, the relationship with the DXY has been weakening, sitting at just -0.29. While correlation does not automatically mean causation, when it comes to gold, it’s a safe to say it is.

Middle East geopolitical risks remain a significant outlier

The daily chart below shows the correlation between gold and US 10-year yields over a 20-timeframe period over the year. Apart from the rapid escalation in Middle Eastern tensions back in October, even with the situation around the Arabian Peninsula incredibly fluid, the inverse relationship has been gradually strengthening pushing into February.

That suggests that while geopolitical developments can assume the role as a key driver of the gold price on risk aversion flows, unless the impact sparks further developments, the impact is often temporary when it comes to directional risks. It means that while gold traders should be alert to new news on the conflict, the thing to watch right now is longer-dated bonds and what could influence movements in the week ahead.

Fed speak, bond auctions the key known events

Looking at the known risk even calendar, Fed speak and bond auctions loom as potential catalysts. Here’s the chronological order of what to watch along with a brief synopsis as to why some may be important.

Sunday

US Federal Reserve Chair Jerome Powell interviewed on US 60 Minutes: It’s a pre-recorded interview so misses the payrolls report. Having only spoken a few days earlier following the FOMC rate decision, it looms as a low-probability, high-risk event for bonds should he deviate meaningfully from Wednesday’s messaging.

Monday

US ISM non-manufacturing PMI: a report that doesn’t get the attention it deserves relative to the far smaller manufacturing sector report released last week. Keep a close eye on the employment subindex, in particular. It tumbled in December and bonds have been ultra-sensitive to most labour market data recently. Once is an anomaly, twice is a trend..

Tuesday

Cleveland Fed President Lorretta Mesta speaks: She’s a FOMC voter, retiring in June and was influential on the reversal in bond yields prior to the Fed’s policy pivot. She has scope to speak more freely than most.

US 3-year Treasury note auction

Wednesday

Fed Governor Adriana Kugler speaks: She’s only recently appointed and is regarded as an expert on the labour market. Enough said.

Philadelphia Fed President Patrick Harker speaks: He didn’t sound in a rush to cut in late December. Is he likely to think differently now given momentum in the US economy since?

US 10-year Treasury note auction

Japan 30-year bond auction: Demand at recent auctions has been soft and the BOJ is the only major developed market central bank still contemplating rate hikes. Japanese government bonds (JGBs) can and have influenced US yields previously.

Thursday

China CPI and PPI: Two releases that have implications for fiscal stimulus in China and imports prices for trading partners, such as the US.

US 30-year Treasury bond auction

Gold grinding higher within broader channel

For those contemplating initiating positions in gold, the chart below reveals that after trading in a downtrend from the highs hit in December, the price managed to break through that earlier this week, rising above the 50-day moving average to sit comfortably within a horizontal channel. The bias is clearly higher heading into the payrolls report, as shown in the string of consecutive up candles. But the long upside wicks suggest it may be a tough slog to see meaningful upside near-term with an unexpected bullish catalyst. Sellers are present.

Resistance kicks in around $2065 ahead of the trio of yearly highs set between 2021 to 2023. On the downside, support has been noted at the 50DMA and $2006. Below, gold has done a lot of work on both sides of $1980 although that weakened somewhat late last year.

-- Written by David Scutt

Follow David on Twitter @scutty